What President Obama Doesn’t Want You to Know

The truth about the stock market’s rise and the amount of money borrowed by hedge funds (it’s a BIG number)

The amount of borrowed money it takes to achieve $1 of GDP activity

Dear Readers,

People keep talking about the economy recovery. But no one talks about why the economy is recovering.

As I mentioned time and time again, this is the first time in history that every major central bank in the world is printing money.

That means the world is piling on more debt than ever.

The greatest transfer of wealth is taking place right before your eyes.

Yet very few people grasp the severity of the situation.

Over the past few years, I have written diligently on what is really happening to the world’s financial system; not only how it affects your wealth, but your very livelihood – and your kids too.

The rich are getting richer, and the poor are getting poorer. What makes this situation worse is that the general population has been manipulated to believe things are getting better.

But that’s far from the truth.

Why Things are Worse, Not Better

The other day I had a conversation with a very bright and successful real estate agent. What started out as an exchange of views on real estate gradually escalated into a discussion about what caused the 2008 financial crisis and why things have only gotten worse since then.

Like the general population, she believed things are getting better. She also believed that Canada is nowhere near as bad as the U.S., especially in terms of leverage because of Canada’s conservative banking system.

I didn’t argue any of her comments, but I asked her, “What do you think caused the 2008 crisis?”

She replied as everyone else always does, “greedy bankers.”

Then I asked her why she thought things are getting better.

She replied, “Well, housing prices are climbing back, jobs are coming back, and the stock market is doing extremely well.”

She was right. Housing prices have been climbing, unemployment has been improving, and the stock market is higher than it’s ever been before.

But that’s not why things have gotten better.

So I explained.

The Truth About the Economy

Things have gotten better because the government, and the Fed, have decided to fix the problem with more leverage, more speculation, and more greed.

In other words, the same thing that crashed the market is now being used to fix it.

People have a very short memory. They’ve already forgotten that it was a low interest rate environment and ease of borrowing that led to the housing bubble in 2008.

They’ve already forgotten that borrowing beyond their means can lead to disaster.

If the U.S. single-handedly crushed the world economy and financial markets in 2008, what happens when the whole world plays the same game?

Borrow Lots, Achieve Little

Since 2008 the G7 has created around $1 trillion of nominal GDP activity, but have added nearly $18 trillion of consolidated debt*, which now sits at a whopping – and new record – $140 trillion.

(*$5 trillion was provided by central banks (Fed, Bank of England, European Central Bank, and Bank of Japan)

That means over the past five years, it took the G7 $18 dollars of debt – to create $1 of growth.

The 2008 crisis was caused by over-leverage, yet over the past four years the consolidated debt/GDP ratio of the G7 nations has increased to an insane 440 per cent.

The real estate agent was beginning to see the picture.

However, she – like most people – thinks Quantitative Easing (QE) and all of these stimulus measures are a good thing because it gives everyone more money to spend which increases confidence.

And again, she was right.

Low interest rates and QE forces banks to lend and people to borrow.

The premise behind QE is simple: the more money we borrow, the more we spend, the more confidence we become, and our problems should solve itself.

But what she failed to mention is that all of that money needs to be paid back.

She didn’t get it.

So I explained to her what printing money (or QE) really is.

QE in Layman’s Terms

QE is a last resort to stimulate the economy when the cost of money (interest rate) is already as low as it can go.

I repeat, it is a last resort.

The money supply grows when a central bank “buys” financial assets, such as bonds, from commercial banks and other private institutions.

These commercial banks and private institutions now have more money on their balance sheet as a result of their “sales” and that means they now have more money to lend out.

(Conversely, if the Fed wanted to tighten the money supply, it will sell commercial banks financial assets. Since the commercial banks need to use cash to pay for them, it decreases the amount of money in the system.)

While the Fed, America’s central bank, has a balance sheet (like all banks), it is the one and only bank that is never audited. That essentially means it has an endless supply of money.

Where Is the Money?

Trillions of dollars have been printed since 2008 and you might wonder where all the money has gone.

The agent did too. She asked, “Well, since trillions of dollars have been printed, it couldn’t have all gone into consumer spending…right? Because of it did, we would have a much higher GDP as a result.”

Right! She was catching on.

(You can go back to my Letter, “The Dramatic Drop” to understand more about money velocity, or rather how money enters the system)

The government wants the banks to lend so people can spend, but people can only borrow so much based on their financial situation.

All of the money sitting at the banks from their sales to the Fed need to be lent out, so that the banks can make money on the interest while fulfilling their obligation to the government and the Fed to lend and stimulate the economy.

Since the average American can only qualify for a small loan, the banks have to resort to other practices.

They lend to those who can afford to borrow lots.

And the only ones with the capacity to borrow billions trillions of dollars are big funds and traders who collateralize the debt with other assets, such as stocks and financial assets, or hard assets such as gold and real estate.

“According to Bloomberg, The nation’s (US) largest hedge funds borrowed more than $1 trillion as of the fourth quarter, yet only had net assets of $1.47 trillion:

“The nation’s largest hedge funds had $1.47 trillion in net assets and more than $1 trillion in borrowings as of the fourth quarter, according to the first report compiled on confidential data they provided to the U.S. Securities and Exchange Commission.

…The funds reported having $1.47 trillion in net assets and $1.06 trillion in aggregate debt during the fourth quarter. Debt includes secured and unsecured borrowings for each fund and excludes “other significant

methods of incurring leverage,” such as derivatives, according to the report.

…The report also provided details on the liquidity of the assets held by the funds.

Twenty-seven percent of their $1.47 trillion in net assets could be divested within a day, according to the SEC. Fifty-three percent of the net assets could be liquidated in a week or less, the large managers said, and 71 percent would take no more than a month to sell. Fifteen percent of assets would take more than six months to liquidate.

The agency also detailed how quickly the managers allowed their investors to cash out. About 7 percent of the $1.47 trillion could be withdrawn by investors in a day, and 24 percent could be taken out within a month. Investors could redeem about 59 percent of the total capital within 180 days, the report said. About 26 percent of capital would take more than a year to get back.”

Not only are hedge funds highly leveraged, but their leverage is now likely much higher than the Q4 reports. If that is the case, then hedge funds are borrowing over $1 trillion.

Note that the above report only shows borrowing from the biggest hedge funds; it doesn’t even factor in smaller funds or other non-hedge fund financial institutions.

A few years back when I predicted that the S&P will set new highs despite the slow and vulnerable economic recovery, everyone asked me why.

The answer is simple: When funds are borrowing trillions of dollars and injecting it into the stock market, stocks rise.

The agent was beginning to understand.

But she asked, “Okay, that’s the reason stocks are rising, but how do you explain the growth in consumer confidence?”

It has been President Obama’s goal to turn GM and the American automaker sector around, which he said would provide jobs for Americans.

GM has restructured itself since its bankruptcy in 2009 and is now once again a leader in car sales. And with soaring car sales, you would think the economy would be in much better shape and provide many more jobs.

But you’re wrong.

While auto manufacturing employment is up since 2009, and the motor industry has accounted for 15 to 20 percent of economic growth, it’s accounted for only 2 to 3 percent of job growth.

Furthermore, middle-income jobs (such as autoworkers) made up 60 per cent of jobs lost in the recession, but lower-wage occupations have accounted for around 60 per cent of jobs gained in this recovery.

But there’s an even bigger problem.

GM, now the leading automaker, hasn’t risen from the dead because of its innovation or the quality of its cars.

It’s sales are soaring because its practically giving away cars for free.

According to GM’s annual SEC filing, GM Financial (GMF), the Company’s in-house financing arm, reported that delinquencies grew by about $200 million to a whopping $933 million in 2012.

That’s nearly $1 billion in delinquencies last year.

That means delinquent contracts in 2012 at GM represent 8.5 percent of all auto loans – higher than delinquencies at Ford, Toyota, and Honda combined.

How is that possible?

The Subprime Auto Market

85 per cent of GMF loans are subprime.

That means 85 per cent of GM’s loans are high-risk loans made to potentially unqualified buyers. And the number of subprime loans are rising.

In 2011, 8 per cent of GM Financial loans were given to borrowers with credit scores above 660. Last year, only 4 per cent of GMF borrowers had credit scores above 660.

But that’s not all.

Like subprime mortgages, subprime auto loans have also been turned into financial assets that are sold to the public who assumes the risk of those loans.

According to Deutshce Bank, the demand for asset-backed bonds linked to subprime car loans surged 20 percent to $12.9 billion this year, compared with the same period in 2012.

A couple of weeks ago, General Motors brought to market its first unsecured bond offering since coming out of bankruptcy, in a blockbuster USD 4.5bn deal.

These notes include $1.5 billion of 3.5 percent notes due in 2018, $1.5 billion of 4.875 percent notes due in 2023 and $1.5 billion of 6.25 percent notes due in 2043.

Generally, unsecured bonds return a much higher interest rate because of their uncollateralized risk. The GM terms not only show us how desperate investors are for returns in this low interest rate environment, but it also illustrates how the effects of money printing and low interest rates encourage even more leveraged risk.

Simply put, we’re in a high risk, low reward environment.

Remember this:

“…We all know the story by now: Mortgages sold to people who couldn’t afford them, or even sometimes understand them. Banks and investors allowed to keep packaging the risk and selling it off. Huge bets — and huge bonuses — made with other people’s money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn’t have the authority to look at all.

It was wrong. It combined the breathtaking greed of a few with irresponsibility all across the system. And it plunged our economy and the world into a crisis from which we’re still fighting to recover. It claimed the jobs and the homes and the basic security of millions of people — innocent, hardworking Americans who had met their responsibilities but were still left holding the bag.” – President Obama

Here we are just a couple of years later and GM is not only increasing its subprime loans, but the financial instruments spun off from these loans are now higher than before.

Obama’s goal was to revive GM at any cost – even if it means recreating another subprime scenario.

Back to Canada

My conversation with the agent reverted back to Canada and its strong housing market and conservative banking system.

She asked, “Well, Canada most certainly is doing better than the U.S., and we don’t have the same major issues that caused their subprime market.

To which I replied, “For now…But do you know that Canadian household debt climbed to a new high in the second quarter this year?”

A few weeks ago, Statistics Canada told us that the ratio of household credit market debt to disposable income increased to a new high of 163.4 per cent in the second quarter.

That means Canadians owe just over $1.63 for every $1 in disposable income they earn in a year.

“Do you know what the household debt-to-disposable income ratio was in America in 2007, right before their economy went bust?” I asked.

163 per cent.

While these ratios are calculated differently in the U.S. and Canada, new statistics show that Canadians are now more indebted than Americans – even when adjusted for the differences*.

(*When adjusted for Methodological Differences in Canada/U.S. Calculations, the Canadian ratio is closer to 152 per cent, while Americans are at now at 140 per cent)

Furthermore, its becoming more expensive for Canadians to buy homes, leading to many borrowers who overextend their borrowing capacities.

New data from the 2011 National Household Survey shows us that 49.7 per cent of households ages 24 and under spend over the affordability threshold – defined as 30 per cent of total household income – on shelter costs including rent or mortgage payments, property taxes, condo fees and utilities.

Overall, 25.2 per cent of Canadian households exceed the threshold set by the Canadian Mortgage and Housing Corporation (CMHC).

The agent’s demeanor had now turned a 180

So I finally asked, “Do you remember what 2007 was like right before the crash?”

To which she responded, “Housing prices were soaring, unemployment was low, and the stock market was doing very well.”

I continued, “That’s right. But as we just discussed, all of that was the result of borrowing too much money…Where do you think we are now?

Obama’s lack of business knowledge was supposed to be helped when he surrounded himself with mart people( friends). The Secretary of Labor,Energy, Transportation, Health, State, Defense, Envor., Education, ETC. GET THE POINT EVERYBODY HE HAS HIRED HIMSELF HAS EITHER QUIT OR BEEN FIRED AND HE TAKES NO BLAME ALSO SOME HAVE RETIRED BECAUSE THEY KNEW HIS LIES WOULD CATCH UP TO HIM. He treats China better than he treats our best Neighbor CANADA and he has hurt them immensely because of his borrowing from China he has to give them perks and he uses Canada as bait. We do not need them (CHINA) THEY NEED USA and CANADA and OBAMA has thrown CANADA under the bus and know they won’t help him no more, Please forgive us CANADA for we knew not that Obama was a snake, make him pay or he will have his Muslim Brothers running the USA!

Blame Obama! Blame Obama! Blame Obama! Despite the fact that Presidents have no control over the Fed. Right? You Tea Party Republican Types have no shame, no trace of objectivity!
Your article didn’t mention inflation. Why? Because there’s none? Ha! See how I knew you were biased?
Why did I waste time reading your article? Aren’t you one of those ‘Pump’n’dumpers’?

Want to find out where you live.Here in So California,there is plenty of inflation,in goods and services.Lots of product downsizing,everywhere I look.Actual inflation can be found by multiplying govt figures by 2.5-3 times.That will give you inflation,well over 5%.

Thank You, Ivan !! Your education and information
is very timely for all of us retail investors. In particular, I appreciate your honesty and “telling us the facts” that many bankers and politicians neglect. Kindest regards, Patricia
P.S. We all need to proceed with caution, and open our awareness to massive government debt and
massive private debt !!

Great commentary Ivan! Ultimately, the only tangible “insurance” governments and individuals can buy to get through the coming financial tsunami is gold. Which begs the questions: how much gold does the U.S.A. really own, is there really any gold left in Fort Knox, why isn’t the U.S. buying massive amounts of gold like China and Russia, and just why are the Germans demanding the repatriation of their gold from the U.S.? If the U.S. dollar is to continue as the world’s reserve currency, the Fed at some point will have no choice but to back the dollar with gold.

Obama called Zimmerman a White Mexican so what does that mean is he a White Black Muslim President who likes to play golf and live in a house on tax payers money or does he lie everyday because he has learned what the word Veto means. Maybe it is just that he can exempt all his friends so they don’t have to live by the rules that Nancy Pelosi says when we get to that page we will see what it says. Really what color is he, that should not matter but it does to him just like when he called Zimmerman a White Mexican. Does he know that he lives in the White House or was that just his TV monitor and he did not know what he said. Maybe he is just color blind and thinks we should all do what his Muslim Book Says! He should take a look at what the Constitution says he might realize that you treat Americans voters with respect not by the different shades of color which brings a good question, what shade of an AMERICAN COLOR IS HE IF ZIMMERMAN IS A WHITE MEXICAN?

Every Tom, Dick, and Harriet, can’t set the Inflation Rate. In the US, it is the Labor Dept. – an impartial and independent body, in any Administration, whatever anyone else thinks, that sets the rate. Case closed.
Exactly where did the President call Zimmerman, a ‘White Mexican’? Where? Where? Give me the quote. I dare you! Zimmerman has shown his true colors AFTER the trial!

Malcolm, while I understand what you’re trying to say, you really need to open your eyes and stop defending Obama with hate. If you think inflation is non-existent, you need to learn what inflation really is and how the numbers by the Fed are drawn up. Spending your way out of a problem is not good as far as I have been taught growing up. Obamacare will cripple America.

Don’t miss the points made in the article. But don’t miss the fact that the stock market has benefitted anyone holding stocks, not just the rich. Not many investors could imagine the Dow at 15,000, when it was at 6,600. And don’t miss the boat when the Dow soars to 21,000 and over in 3 years. Be alert and get rich too!

I’ve been following the Equedia Letter for a long time and Mr. Lo did indeed predict that the S&P would set new highs. He never said stay out of the markets, but rather told people not to miss the boat. I subscribe to many advisory letters and they all scream doom and gloom.

The facts presented in this report show us just how leveraged we are. In the long run, stocks will keep rising. But that doesn’t mean we don’t take deep pauses as we did during the tech boom.

From my interpretation, Mr. Lo is telling us that we’ve had a great run since 2008, but eventually we’ll crash before we climb. Just becareful.

Malcolm, they are independent of each other but Obama nominates the chair of the Fed. The Fed doesn’t control the debt ceiling or the spending of the government who has needed the Fed to buy its bonds because other countries simply wont fund the Americans as much as the americans would like.

Tanya,
Hate? Please, no hate! If you won’t accept the Labor Dept. Stats, Discussion’s over! Fact – Spending has decreased since 1911. Congress supplied funds to fight recessions before 2011. Bad Luck for Obama after 2010! Tanya, if you can’t see the need for Universal H.C. Ins., as all Industrial countries have, I give up! The US Infant Mortality Rate is higher than Europe. Without malice.
Ben, Presidents get to appt. Fed. Chiefs. Most stay on after 1 term, and are left in place by a new Pres. All have same objectives

I am so sorry that Obama thinks you spell Canada like China he is a looses and has thrown the Americans and Canadians under the bus, I wish he would get under the bus. I Love and respect my neighbors from Canada please do not feel Americans are for Obama those ones that have never been conned so much in there life. I am not one of those I knew Obama was a snake , Please accept my apology for a President without no morals or integrity, he has hurt Canada and I respect what ever Canada has to do to stop Obama from putting the screws to you. I do not want China I want Canada who takes care of there land and people being forced financially to go China’s way, neither of us need Communism or Muslim Brotherhood Obama’s friends from getting between our nations as friends, we are different but we all bleed red and Obama’s looking down at Canada is not how Americans think, they just got conned by the Devil’s Apple which is Obama’s Muslim ways hopefully Obama will step down because if he doesn’t stop we will all be run by the Chinese Communism and Muslim hate now is the time to not take his snake bait!!!!!!!!!

Thanks for your astute explanation of why the QEn haven’t yet produced inflation.

My question is what do you think Janet Yellen will do about the situation? She surely understands it and knows that if further stimulus does eventually flow into investment (and the sign of that will be rising employment), Americans will suddenly turn optimistic again and start competing for loans–with the inevitable consequence that interest rates will rise.

Yellen probably foresees this. But she will nevertheless push ahead with more stimulus, because she knows that a 4% rate on U.S. debt, while unsustainable with the GDP at 2%, is easily covered by the new revenues that will come from a 3% GDP. And those new tax revenues will be voted on unanimously by the new Democratic Congress of 2014.

Ivan, lets wake up here for ONCE. I have no doubt gold will have its day and I enjoy your letter but for crying out loud you gold pundits need to wake up. I have made more money following my own intuition on cycles than listening to the constant pounding of gold and silver pundits about the upcoming bull market. Gold will have its day not until all capital flows have done their thing in this very complex world. Yes there are some great deals but guess what gold will go to 1000.00 or less and silver will go to 16.00 or less SO,,,,, why not tell your readers to wait and buy the absolute capitulation that is sure to take place. Then I hear Puvlava, Moriarity, Schiff, and yada and yada, buy the deals yes but why not wait until it is a REAL DEAL. This madness needs to STOP. I am quite frankly surprised at you, you have educated us well and your pics haven’t even been bad BUT the gold bull is 18-24 months away and you know it. Let it go, educate your reader now on waiting for the BIG SHAKEOUT, when there is no bird left in the tree, and then fly then fly in to pick up as many worms as you can. THAT MAKES SENSE MY FRIEND. JB.